As insurance penetration rises, cat bonds become more relevant for Asia Pacific

To date the catastrophe bond market has not really taken off in Asia. There have been a number of transactions which have included Japanese quake and typhoon risk (such as Fhu Jin Ltd., Midori Re, Fujiyama Ltd. and the Atlas Re series a portion of which cover Japanese risks). However no cat bonds have been issued covering the rest of Asia.
A major reason for this is the lack of insurance penetration across the rest of Asia. Countries such as China, Indonesia, the Philippines, Malaysia, Thailand and Vietnam have very low levels of insurance, typically around 15%. This means reinsurance levels are low too. Despite this fact, exposure is significant and as these countries develop and their economies and industry grows so the need for risk transfer will grow with it.

Guy Carpenter published a report on the state of the Asia Pacific Catastrophe Market. In it they say that despite the low levels of insurance penetration Asia Pacific accounts for around 22% of the total catastrophe excess of loss reinsurance limit purchased in the world. Taking the same split, but using premium spend as the measure, the number is closer to 12%.

That figure is mostly across Japan, Australia and New Zealand but over the next few years we are going to see that split spreading across the rest of Asia as they take up more insurance and reinsurance.

Microinsurance and microreinsurance are both becoming popular across developing Asian countries and through this they are becoming accustomed to products triggered on an index (such as weather insurance). Perhaps this experience of utilising alternative risk transfer at a the lower level of microinsurance will make catastrophe bonds and more easily accessible for Asian insurers? Certainly as insurance penetration rises and the magnitude of Asian exposure for global insurance companies rises cat bonds are going to increase in relevance in the region.

What do you think? Are there other reasons that cat bonds haven’t yet become prevalent in Asia?